Cost-Push Inflation

Cost-push inflation is a form of inflation which arises from increase in the cost of production or decrease in the volume of production. In cost-push inflation, the aggregate supply curve shifts leftwards thereby pushing the prices up, and hence, the cost-push.

Cost-push inflation most commonly arises due to supply shocks. For example, an increase in the price of oil increases the cost of production for almost all goods and services and results in immediate increase in inflation. Such an inflation is cost-push inflation. Similarly labor strikes, wars, floods, etc. reduce supply and increase prices.

Cost-push inflation is different from demand-pull inflation which arises due to increase in demand for goods and services.

Examples

Example 1

In early 1970s, the Organization of Petroleum Exporting Counties (OPEC) took steps to decrease global oil supply. During the period there was no extraordinary increase in the volume of consumption, but the prices still surged. What sort of inflation this most likely is?

The increase in general level of prices due to increase in oil, which is an important input in every production process, is clearly a cost-push inflation. Since spending volume has not changed, there is little indication that such an inflation has any demand-pull factor.

Example 2

In 2012, severe floods hit the Punjab and Sind provinces of Pakistan wiping away crops, shutting down refineries, killing cattle and creating widespread disruption in supplies. Increase in general level of prices ensued. What sort of inflation is this?

Increase in price due to drop in aggregate supply is cost-push inflation.